Hbos chief Andy Hornby yesterday urged the Scottish financial services industry to rise to the challenge of the credit crunch.

He admitted the industry was going through a bruising period, warning that the effects will be felt for another 12 to 18 months.

But he added: "We must be wary of letting decreased confidence lead to a vicious circle that further impacts the real economy."

In a keynote speech to the inaugural Scotland Global Financial Services conference in Edinburgh, Hornby, chief executive of HBOS, said: "Our own research indicates the Scottish economic growth is set to moderate during 2008 reflecting both the slowdown in the UK and economic growth more generally.

"And the Scottish jobs market moderated during the first quarter of 2008 with levels of employment, vacancies and pay all exhibiting far slower growth."

He said a modest rise in unemployment was expected as the year developed in Scotland but it would certainly be no quicker than in the rest of the UK.

"Scotland is going to continue to provide a competitive advantage to companies based here," he claimed.

"Indeed you could argue that a low-cost skilled workforce is even more important in these tougher times. We are all going to have to work harder to make sure we produce the number of suitably qualified employees to drive our businesses forward in this tougher world."

Hornby, pictured, also defended the bank's decision to have a £4bn rights issue and said in three years time it would be proved to be the right thing to do.

He said the bank believed it to be the prudent thing to do in the current economic environment.

Since the merger between Bank of Scotland and Halifax in 2001 the group has grown significantly as an employer in Scotland where it has 17,000 staff.

"I would like to think that we have at least played our part in creating a new competitive environment that makes the UK banking sector one of the best value for customers in the world," said Hornby.

He also discussed the question of why the collapse of the US sub prime mortgage market led to investors avoiding asset-backed securities in the UK and throughout Europe.

He said the best answer he had seen was a quote from a former Bush administration member who said if you have 10 bottles of water in front of you and you know one of them contains poison you are unlikely to drink any of them.

"For me nothing else can sum up more simply why the collapse of specifically US sub prime mortgages led to a global loss of confidence in mortgages and asset-backed securities as an investment proposition," said Hornby.

He added that he was pleased to see the UK authorities were acting to alleviate the impact of the credit crunch and the recent move made by the Bank of England last month was definitely a welcome step.